Boeing perhaps the biggest fallen angel, says JPM

Investing.com — Boeing (NYSE:BA) could soon become “the biggest fallen angel in history” with $52 billion in index-eligible debt, JPMorgan strategists said in a note.

The aerospace giant’s credit rating is under pressure after S&P placed it on CreditWatch Negative, while Moody’s and Fitch maintain similar negative outlooks.

For Boeing to officially downgrade from investment grade (IG) to high yield (HY), at least two of the three agencies would have to downgrade the company. If that happens, Boeing’s fall would surpass even Ford’s $51 billion retrograde in 2020, making it the largest in history.

JPMorgan analysts note that “this is an idiosyncratic credit situation, should a downgrade occur. No other great fallen angel has ever made the transition at such close rates.” Tight spreads and liquid trading conditions in both the IG and HY markets could help ease the transition.

On the other hand, Boeing’s size and debt structure present headwinds. With $52 billion in debt, Boeing would be by far the largest HY issuer, accounting for 3.6% of the index – double that of the next largest issuer.

Moreover, a significant portion of Boeing’s debt is long-term, with 45% maturing in more than 10 years, an unusual trait for HY companies.

“This is in line with other recently fallen angels like Kraft Heinz ( NASDAQ:KHC ) on a percentage basis, but much higher on a dollar basis,” analysts noted.

“Currently, there is only $26 billion of long-term HY debt across all HY issuers, so BA would increase the stock of long-term HY debt by nearly twofold. Given what we noted above about capital expenditures for policyholders, it is not clear how much long-term debt would actually go through,” they added.

JPMorgan also points out the complexity of passive investment strategies in both the IG and HY markets. The rising weight of passive funds, particularly in IG, may lead to more forced selling if Boeing is downgraded.

Additionally, about half of HY’s funds are benchmarked to indexes that limit issuer exposure, meaning about $22 billion of Boeing’s debt could exceed those limits.

However, JPMorgan points to the current shortage of high-quality BB-rated bonds, which could make Boeing debt attractive to HY investors despite the risks.

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